Income Tax Appellate Tribunal - Hyderabad
Signoda India Limited , Hyderabad vs Dy. Commissioner Of Income Tax , ... on 24 February, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B": HYDERABAD
(THROUGH VIRTUAL CONFERENCE)
BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
ITA No. 954/H/2019
Assessment Year: 2014-15
Signode India Ltd., Vs. Dy. Commissioner of
Hyderabad. Income-tax,
PAN - AAHCS 8120 Circle - 3(2), Hyderabad.
(Appellant) (Respondent)
Assessee by: Shri S. Rama Rao
Revenue by: Shri YVST Sai/CIT-DR
Date of hearing: 05/01/2021
Date of pronouncement: 24/02/2021
ORDER
PER LAXMI PRASAD SAHU, A.M.:
This assessee's appeal for AY 2014-15 is directed against the CIT(A) - 4, Hyderabad's order dated 25/04/2019 passed in case No. 4/10194/2018-19/ DCIT.
Cir-3(2)/CIT(A)-4/Hyd/18-19 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short "the Act". The assessee has raised the following grounds of appeal:
:- 2 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
"1. The order of l. CIT(A) is erroneous both on facts and in law particularly as the learned CIT(A) dismissed he grounds of appeal without considering the detailed explanations submitted.
2. The learned Commissioner of Income-Tax (Appeals) erred in upholding the order passed by the Assessing officer in disallowing the claim for depreciation of Rs.44,04,03,000/- (which is enhanced to Rs.99,09,96,797/- by an order u/s 154 of the I.T. Act passed by the Assessing Officer) made u/s 32(l)(ii) of the LT. Act.
3. The learned Commissioner of Income- Tax (Appeals) ought to have considered that the disallowance of the claim of depreciation by the Assessing officer as per order u/s 154 was Rs.99,09,96,797/- and not Rs.44,04,03,000/-. The learned CIT (Appeals) ought to have decided the appeal against disallowance of depreciation of Rs. 99,09, 96, 797/-.
4. The learned Commissioner of Income-Tax (Appeals) ought to have considered the fact that while acquiring the Industrial packaging unit from ITW India Limited, the appellant acquired the goodwill of the value of Rs.
792. 79 crores. by paying consideration.
5. The learned Commissioner of Income-Tax (Appeals) ought to have considered the fact that the appellant acquired the business activity as a going concern and the assets including goodwill were valued by BSR & Company and the assets acquired include goodwill valued at Rs. 792. 79 crores.
6.. The learned Commissioner of Income-Tax (Appeals) ought to have considered various legal precedents on the subject and ought to have held that the appellant acquired goodwill and is entitled for depreciation on the value of goodwill acquired of Rs. 792. 79 crores."
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2. Brief facts of the case are that the assessee -company engaged in the manufacturing of strap, stretch and protective packaging and also manufactures packaging tools and equipment that are used to apply the bulk packaging materials, filed its return of income on 26/11/2014 declaring income of Rs. (-)38,67,61,788/-
under normal provisions of the Act and Rs. 12,92,51,431/ -
under the provisions of section 115JB. The case was selected for scrutiny under CASS and statutory n otices were issued to the assessee. The AO completed the assessment by disallowing depreciation amounting to Rs. 44,04,43,000/ -
on intangible assets and added the same to the returned income of assessee. For the sake of clarity, the order of the AO is reproduced as under:
" 2.1. On verification of the audited financial statements filed during the course of scrutiny proceedings, it, is noticed that the assessee claimed depreciation of Rs.106,30,21,315/- as per the provisions of the Income- Tax Rules. On verification of the details of assets on which depreciation was claimed by assessee, it is noticed that the assessee claimed depreciation on tangible assets at Rs. 407.88 lakhs and on intangible assets to the tune of Rs.4404.43 lakhs. The chart of depreciation claimed by the assessee is reproduced for sake of convenience hereunder:
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S i g no d e I n di a L t d . , H y d .
TANGIBLE ASSETS (Rs. in lkahs)
S.No. Description of asset Gross Block Depreciation
claimed
1 Land free Hold 2958.86 Nil
2 Land lease hold 1438.14 4.38
3 Buildings 3068.22 56.18
4 Plant and Machinery 6346.42 307.42
5 Office equipment 309.43 48.24
6 Furniture and Fixtures 58.33 6.07
7 Other Demo Tools 0 0
8 Vehicles owned 38.60 4.16
9 Vehicles leased 177.47 26.69
INTANGIBLE ASSETS
S.No. Description of asset Gross Block Depreciation
claimed
1 Goodwill and other 79279.74 4404.43
intangibles (Note. 36)
2.2. On verification of the information filed, it is noticed from Note 36 to Audit Report filed by the assessee, that the assessee had purchased the packaging unit of M/s ITW India Limited, on slump sale and on 'as is where is basis' for a consideration of Rs.1240 crores, which includes the assets shown in the above tables and capital work-in-progress of Rs. 640,79 lakhs, cash and equivalents, receivables of Rs.23,657.23 lakhs, inventory of Rs.1O,349.89 lakhs and other current assets of Rs.5,306.04 lakhs. The purchase consideration also includes trade payables at Rs.6012.00 lakhs and other liabilities of Rs.5466.77 lakhs. The assessee submitted that it had valued the unit purchased from M/s ITW India Ltd., basing on the valuation done by independent valuers M/s B.S.R. & CO., and filed a copy of the valuation report. As seen from the valuation report and accompanying particulars, it is noticed that the company M/s ITW India Ltd., did not record any goodwill in its books. However, the assessee had determined the Goodwill of the packaging unit purchased from M/s ITW India Ltd., on the pretext that the same is having a sizeable market share in the :- 5 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
packaging activities and clientele basis and therefore computed the goodwill and claimed depreciation on the same amounting to Rs.44.04 crores. The assessee relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs Smifs Securities Limited, wherein the Hon'ble Supreme Court held that the excess consideration paid towards the reputation which the amalgamating company was enjoying for retaining its existing clientele was considered to be goodwill and thereby eligible for tax depreciation on 'intangible asset'.
2.3. The contentions of the assessee are considered and found not acceptable. Therefore, a letter was addressed to the assessee company requiring it to show -cause as to why the depreciation claimed on the goodwill should not be disallowed. The important issue raised in the show-cause letter are reproduced for the sake of convenience.
"After perusal of the above reply and considering the facts of the easel circumstances of slump sale involving no good will either in the books of seller of the slump unit or it got any specific business or commercial rights as envisaged in the 1f,come-rax Ad. Hence you claim is neither justifiable nor reasonable in view of the following analytical and logical conclusions as per the provisions of the Income- Tax Act.
• Assessee has claimed that it has purchased packing business unit of ITW India Ltd at a Fair Market Value as slump sale as per the independent valuation report of Mis BSR and Associates for consideration of Rs.1240. 00 crores. The excess value attributable to ex cess of the value of assets as per the books as acquired from ITW India Limited was recorded as attributable good will on notional basis and claimed it as an intangible asset compared to business or commercial rights of similar nature of knowhow. license etc. Apparently this is not true as the value intrinsic to various fixed assets such as land, buildings and even to plant and machinery is :- 6 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
much much higher than the book value of these assets. These assets were notionally depreciated under Income Tax Act and were duly claimed by the earlier concern as part of packing business unit assets of ITW India Limited i.e., mere claim of depreciation would not necessarily brought down the resale value in the market on fair market basis. Further, the value of land shown at Rs.34 crore is much much lower than the prevailing market value of the land as part of slump sale. Hence, considering the excess value of net assets book value on this analogy by the valuer engaged by your companies without any genuine analysis of its fair market value would lead to skewed assessment of valuation. Further, the following distinguishable facts are notable as per the working submitted/used in the valuation report.
(i) As observed at para 5.2.6 it is clear that ITW India Limited recorded goodwill on account of its acquisition of Wintek Flexo Prints Partnership Firm in F.Y. ending 31/03/2012 and on similar analogy it has also recorded intangible assets on account of the same transaction.
The qualifying notes as given in valuation report o n acquisition are as under:
5.2.6. Signode recorded goodwill of INR 143.2 million in CY 2012 on account of acquisition of Wintek Flexo Prints (Wintek). Wintek was a partnership firm based out of Bangalore engaged in producing branded lables in India.
5.2.7. Intangible assets amounting to INR 173.4 million were recorded on account of acquisition of Wintek.
These intangible assets comprise trademarks and trade name - INR 34.6 million, unpatented technology - INR 41.2 million, non-compete agreement - INR 18 million and customer relationship - INR 79.6 Million.
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Hence, in view of above facts of the case, chronology of events, 1 acquisition of Mis Wintek by ITW Signode and subsequent slump purchase by the assessee of other business unit etc. Assessees contention to place reliance on CIT Vs Smifs Securities Limited [2012] 348 ITR 302(SC) of Hon'ble Supreme Court of India on this issue is neither comparable nor applicable to the case of the assessee.
The facts of the case and various judicial pronouncements adjudicated which were quoted by you in support of your claim is totally class apart and not comparable to the facts on hand. Similarly the citation of SKS Micro Finance Ltd Vs DCIT [2013] 145 ITO 111( Hon'ble ITAT; Hyderabad) and AP Paper Mills Limite d Vs ACIT [2010] (128 TTJ) 596) (Hon'ble ITAT, Hyderabad), are also distinguishable to the facts on hand and improper valuation of total consideration as analyzed supra.
Accordingly, your contention to treat the goodwill towards intangible assets banking upon erroneous valuation and the method adopted by them without taking the complete asset base of your business assets over and above the book value as attributable to good will comparable to actual rights bought was completely devoid of merit and not supported by I. T. Law.
On perusal of the above/ it is clear that existing unit of industrial packaging business was purchased as slump sale on las is where is' basis with existing assets and liabilities for total value of Rs.124000 lacs. This unit is intrinsic to all the assets including land building/ receivables/ other plant and machinery so on so forth. This value is apparently and truly much higher than the book value/ as it is to bring the fair market value of the unit on slump basis as going concern. Apparently there is no goodwill as a qualified asset in the books of ITW India Limited before its slump sale. In the absence of the same it is not fair and justifiable to conclude :- 8 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
purchase value over and above the net asset value as a deemed good will by adopting the assets on the basis of book value as they have got already depreciated in the notional sense as per the Income- Tax Act though they have higher intrinsic value.
This can be clearly seen with reference to land value adopted at Rs.3400.00 lacs as given in the above note.
2.4. In response to the show-cause letter cited above, the assessee filed its reply on 28/12/2016 and the main contention of the assessee is the same of the first reply and it mostly relied upon the valuation report and also on the market share of purchased company. The assessee submitted that the value of land was properly valued by the independent valuer and there cannot be much growth than considered l by the assessee. The important submissions made by the assessee are re- produced here under:
a) M/s BSR and Associates have valued the packing division using most accepted valuation methods viz., discounted cash flows method (DCF), comparable companies method and comparable transactions method and the average value of these three methods has been taken to be the value of the industrial packing division. Thus a value of Rs.12400 million is arrived at after considering the above most accepted valuation methods.
b) for determination of fair market value and for accounting the allocation of consideration paid towards tangible and intangible assets acquired under slump sale the company had obtained the purchase price allocation report from BSR and Associates. The consideration paid by the company was allocated to the tangible assets including land as per the afor esaid valuation report and the excess of fair assets acquired was recorded as goodwill and accordingly the company :- 9 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
has claimed depreciation on the same as per the provisions of section 32 of the Act.
c) The company has purchased packing division of ITW India Limited with commercial rights such as market share in contract packing/ steel strapping and seals, labels division, market share in PET Straps division, distribution relationship, assembled workforce etc., and acquired various advantages and intangible assets and claimed depreciation u/s 32 of the I. T. Act on GOODWILL.
d) land acquired under slump sale recorded in the books of the company at Rs.34 crores is based on the fair market value as per the valuation report i.e ., price purchase allocation report issued by BSR and associates under the sales comparison method based on the recent transactions/sales transfers of offerings/bid prices of comparable assets. Accordingly the land is valued at Rs.34 crores as against the book value on the date of transfer in the books of M/s ITW India Limited of Rs.9.47 crores, which is substantially higher. The stamp duty has also been paid on the same values to effect the transfer of property in our name, and therefore, your goodself allegation that value of land at Rs.34 crores is much lower than that of the prevailing market value is erroneous.
e) We submit that value of land is not at Rs.792.97 crores and there is no such mammoth increase in value of land. The price paid for acquisition of division is towards various tangible and intangible assets of the packing division which includes a certain portion of land as mentioned above.
f) the assessee has no intrinsic business right in the packing business in comparison to his competitor on other market share business and therefore, the allegation that excess consideration paid over and above the net asset value as attributable to goodwill is :- 10 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
completely illogical and without any verifiable evidences.
g) The company M/s ITW India Lmited, is having 51% of market share in Contract Packing Segment, 36% market share in the labels division (branded steel strip which is primarily used by jute and cotton industries) etc, and the assessee company had purchased the said unit keeping in view of the market share of the company (M/s ITW India Ltd.) and because of the ready market share that would be enjoyable by the assessee company.
The submissions made by the assessee are carefully considered and found to be not acceptable. As stated supra, it is clear that ITW India Limited recorded goodwill on account of its acquisition of Wintek Flexo Prints, Partnership Firm in F.Y. ending 31/03/2012 a nd on similar analogy it has also recorded intangible assets on account of the same transaction. The qualifying notes as given in valuation report on acquisition are re-produced for the sake of clarity, as under:
5.2.6. Signode recorded goodwill of INR 143.2 million in CY 2012 on account of acquisition of Wintek Flexo Prints (Wintek). Wintek was a partnership firm based out of Bangalore engaged in producing branded lables in India 5.2.7 Intangible assets amounting to INR 173.4 million were recorded on account of acquisition of Wintek.
These intangible assets comprise trademarks and trade name - INR 34.6 million, unpatented technology - INR 41.2 million non-compete agreement - INR 18 million and customer relationship - INR 79.6 Million.
From the above, it is clear that prior to slump sale, I TW India Limited do not have any good will or intangible asset in its books as attributable to industrial packing :- 11 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
business unit which was claimed to be purchased by this assessee on slump sales, i.e., good will existing in the books of ITW India Limited is relatable to M/s Wintek unit acquired by it in earlier year and not pertain to the unit, purchased by our assessee MIs Signode India Limited. The good will introduced in the assessee's books is completely new and artificial and is not equitable to commercial rights or business rights as defined in I.T. Act.
The assessee had been thrusting over the valuation report which mainly dealt with share of packing unit business in the market of packing business manufacturing or branded steel strip business and labels division etc. This completely has no basis to claim the same as its business or commercial right as existing in its books and as sold to assessee as part of slump sale. This is a mere presumption of market penetration as one of the business unit in this industry. On the similar analogy, valuation report also refers to agreements entered with distributors to promote and market and present existing, future possible orders etc., were also referred. Similarly, in house supply chain software/inventory right as existing to the packing l business and certain business tools developed for packing activities etc. were also referred in the valuation report while assessing the possible excess consideration paid over and above the net asset value attributable to goodwill. This is completely illogical and without any verifiable evidences as assessee has no intrinsic business right in the packing business in comparison to his, competitor on other market share business Le., this unit has no intrinsic right such as non - competent business or commercial right as to do the business with its exclusivity to the market share it occupied. Hence, valuation report on this analogy is neither justifiable nor supported by any factual or legal rights existing or occurring in the true sense to treat them as defined under section 32 (explanation 3) of I.T. Act.
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Hence, in view of above facts of the case, the depreciation claimed by assessee on 'good will and other intangibles' working out to Rs.44,04,03,OOO/- is disallowed and added back to the income returned. "
2.1 The assessee preferred an appeal before the CIT(A) and filed written submissions before the CIT(A). After considering the written submissions of the assessee, the CIT(A) dismissed the appeal of the assessee.
3. Aggrieved the assessee is in appeal before the Tribunal.
4. The ld. AR reiterated the submissions made before the authorities below and further the he Vehemently argued the case of the assessee. He stated that the assessee has paid consideration over and above from tangible assets has been recorded as Goodwill and depreciation was claimed as per the prescribed rate of Depreciation and in support of his argument he has relied on the number of judgements which are place on record containing paper book page no.
01-113 AR filed elaborate written submissions in support of assessee's case, the gist of which are as under:
:- 13 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
(1) The appellant acquired the Industrial Packaging division held by ITW India Limited after due diligence for a consideration of Rs. 1,240 Crores.
('2) The total value of the unit was got valued by ITW India Limited and for the purpose of accounting, th e values of the individual assets were got valued by the appellant through the same authorized valuer BSR & Co, Chartered Accountants.
(3) The appellant, after purchase of the unit, made appropriate entries in its books of account which include the commercial rights valued at Rs. 792.7 Crores debited under goodwill.
(4) The appellant made appropriate claim in respect of all the assets and liabilities received on transfer including depreciation on goodwill.
(5) The AO accepted all the claims except for the depreciation on goodwill. The only ground for the AO and the CIT(A) to reject the claim was that the value of the land was undervalued for increasing the value of goodwill.
(6) The contention of the appellant is that the value of the land was correctly adopted by the valuer and for this purpose, evidence is produced before the Hon'ble Tribunal by way of certificates from the Sub-Registrar.
(7) The claim of depreciation on goodwill is supported by various decisions submitted along with the present written submissions.
(8) The restrictions mentioned either in Sec 32 or in Sec 43 cannot be applied to the claim of depreciation as depreciation on goodwill is not claimed by ITW India Limited.
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(9) The AO having accepted the value fixed by the valuer for all the assets cannot find fault with the valuation of goodwill, particularly when the value of the land is adopted by the valuer at a higher rate than certified by the SRO.
(10) The objections/contentions raised by the CIT -DR are without any merits in view of various submissions made in the earlier paragraphs.
(11) The transferor company ITW India Limited paid tax on the capital gains adopting the sale consideration at Rs.1,240 crores as reduced by costs of transfer of about Rs. 6 Crores. The copy of the return of income filed by the said company is submitted.
4.1 Further, the ld. counsel filed written submissions with regard to the sale of the industrial packaging business by ITW globally,. The same are as under:
ITW Inc., is a US listed company. It was managing industrial packing business globally. ITW India Limited, a subsidiary of ITW Inc., was carrying on such industrial packaging business in India. The ITW Inc., as a part of its enterprise strategy and portfolio management initially decided to exit its industrial packaging business globally. In the process ITW India Limited, transferred its industrial packaging business in India to Signode India Limited and the assessee Signode India Limited was transferred to the management of Carlyle group.
In this regard, the following sequence of events are relevant:
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i) ITW India Limited entered into Business Transfer Agreement with the appellant on 22.11.2013 effective from 30.11.2013.
ii) The industrial packaging segment was sold to the Carlyle group and this was announced in a release by ITW in its business review dated 06.02.2014.
iii) The transfer of the industrial packaging unit was complete by 01.05.2014 and to this effect the Carlyle group announced in the Press Release wherein it announced that it has acquired Signode India group through ITW on 01.05.2014.
The above events clearly indicate that ITW Inc., in order to achieve its objective of exiting from its industrial packaging business globally, reorganised its business activity and in the process the industrial packaging unit was transferred to Signode India Limited which was ultimately transferred to Carlyle group.
Besides, ITW India Limited admitted Rs.807 crores of capital gains and paid tax of Rs.183 crores and it also paid dividend distribution tax of Rs.178 crores on distribution of dividend of Rs. 1,050 Crores post the sale of the Industrial Packaging unit to Signode India Limited. The aggregate of the tax paid by ITW India Limited is 45.38% of the goodwill transferred to the appellant which clearly indicates that no advantage is derived by transfer of the goodwill. The payment is 45.38% and the tax benefit is about 33.99% and the loss suffered is 11.39%.
4.2 Referring to the above submissions, the ld. counsel requested to allow the appeal of the assessee.
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5. The ld. DR also filed written submissions before us, which are as under:
1. In this appeal, the assessee is aggrieved of the decision of AO and CIT(A) on the issue of disallowance of claim of depreciation on goodwill claimed to be acquired by the assessee upon acquisition of packaging unit from Wintek Flexo Prints of ITW India Ltd. The assessee is also aggrieved of the fact that the CIT(A) did not adjudicate the issue on the value enhanced in rectification proceedings u/s 154 and confined to the value as per assessment order u/s 143(3).
2. It is submitted that on 22/11/2013, the assessee entered into a business transfer agreement with its sister concern ITW India Ltd for transfer of an industrial packaging unit. It is also submitted that both the assessee and ITW India Ltd are subsidiaries of Illinois Tool Works Inc, USA (ITW). ITW India Ltd is a direct subsidiary and the assessee is an indirect subsidiary of ITW Inc. The assessee was a subsidiary of ITW India Ltd till 22/10/2013 and on 23/10/2013, it became a subsidiary of Strapex Holdings Ltd, UK, which is in turn a subsidiary of ITW Inc. Copy of the business transfer agreement is available at pages 97 to 110 of the first paper book filed by the assessee on 08/07/2019. The transfer of the unit was as a going concern and was a part of global business rearrangement of ITW group. There was an MoU dated 04/10/2013 which is superseded by the agreement dated 22/11/2013. List of the transferred assets is available at Exhibit B of the agreement (available at pages 104 to 107 of the paper book filed by the assessee. The list contains items like Goodwill - Cost and Accumulated Goodwill Amortization. No values are fixed for individual assets and assumed liabilities as the sale is a going concern. Also in the books of the assessee, the only intangible asset as on 31/03/2013 is license fee.
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3. A significant part of clause 2.1 of the agreement which indicates transferred assets contains list of "other assets" which is available at Exhibit "C" of the agreement. As per the agreement, these assets would be retained by the transferor. These assets include trade names, logos, Internet addresses and domain names, trade marks and service marks and related registrations and applications used in the Business that consist of or contain "ITW", "Illinois Tool Works" or any derivation thereof.
4. The consideration for transfer of business is also fixed at a lump sum amount of 1240 Cr and no basis for the price is available from the agreement. It is clearly mentioned at clause 2.6 of the agreement that the purchase price is a lumpsum consideration and "No specific part of the purchase price is allocated to any specific asset, right or other interest of the Transferor comprising the Business, nor can the purchase price be so allocated. Any allocation of consideration provided for in the transaction documents, if applicable, is the fair value agreed between the transferor and transferee solely for the purpose of calculating stamp duty and any registration charges"
5. It is humbly submitted that from the above, it is clear that lumpsum consideration was fixed on a basis which is known only to both the parties that too subsidiaries of the same parent. It is also clear that no purchase price is fixed to any individual asset or right or other interest. The transfer date is also fixed as 23:59 hours of 30/11/2013.
6. It is humbly submitted that this being the case, there is no justification for the assessee to show the balancing charge arising out of individual valuation of assets as goodwill arising out of transfer of business, more so when the agreement itself prohibits allocation of individual values to the assets. The fact that the basis :- 18 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
for transfer price is in the individual knowledge of the transferor and transferee and also the fact that both the parties are under the control of same management clearly indicate that the claim of fictional goodwill is nothing but deriving undue benefit out of oneself at the cost of Revenue.
7. The two valuation reports of BSR Associates which are available at pages 111 to 191 of the first paper book filed by the assessee has limited relevance in the above context. The first valuation report is dated 28/10/2013 with valuation date 30/06/2013 as per statement of work assigned by ITW Inc on 30/08/2013. From the terms of engagement available at clause 2 of the note of the valuers (at page 117 of the paper book filed by the assessee), it is evident that BSR Associates was appointed by Illinois Tool Works Inc (ITW) which is mentioned as client by the valuer to act as financial advisor to the proposed slump sale. From the fact that it is the parent company which appointed the valuer and not the assessee, it is apparent there is unfair fixation of transfer price to benefit the transferor at the cost of the assessee, the matter being an affair between parent of the assessee and the assessee. It is also clearly stated in the terms of the agreement that the valuation is for the purpose of slump sale only and not for the purpose of arriving at a fictional goodwill after the slump sale.
8. At clause 3 of the valuation report which mentions the scope and limitation of the work, it is evident that the report is based and relies solely on the underlying management assumptions and management business plans provided by the management of ITW Inc and the valuer did not carry out independent verification of financial projections and underlying data. The valuer also clearly states that he does not express any opinion on the factual basis of the information and if there were any omissions, inaccuracies or misrepresentation of the information provided by the management of ITW, this :- 19 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
may have a material effect on his findings. Therefore, the valuation report is nothing but an arithmetical exercise feeding management given input into a financial model to arrive at mere numbers without much support.
9. It is also humbly submitted that as seen from clause 5.2.6 of the report of the valuer, Signode recorded goodwill of . 14.32 Cr in Calendar Year 2912 on account of acquisition of the partnership firm Wintek Flexi Prints. As per clause 6.1.2.4 of the report, goodwill of . 14.32 Cr was expected to remain constant throughout the forecast period. However, a much higher value of fictional goodwill is computed merely on the basis of balancing charge based on arbitrary price fixed for transfer.
10. The second valuation report is dated 02/06/2014 and is meant for purchase price allocation of Signode India Division of ITW India Limited. This report is also as per the terms of engagement with ITW Inc. This report is also of limited value and relevant only for the purpose of claiming depreciation on the assets acqui red as per Explanation 4A to section 43( 1) which reads as under:
"Explanation 4A. -Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the assets were at any time used by any other person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person and such person acquires on lease, hire or otherwise assets from the first mentioned person, then, notwithstanding anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned person, shall be the some as the written down value of the said assets at the time of transfer thereof by the second mentioned person".
:- 20 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
11. Clause 10.2 of the second valuation report clearly indicate that the purchase consideration is for acquisition of 100% equity. Therefore, the price is paid for 100% control of equity and more in the nature of premium for acquisition of 100% equity control and therefore the balancing charge is not in the nature of goodwill. It is humbly submitted that during the relevant Previous year, just one day before the business transfer, the ownership;' of the assessee changed by way of transfer of share capital from the transferor (Inn India Ltd) to Strapex Holdings Ltd, UK. Therefore, the transfer of the packaging unit Is part of a comprehensive business arrangement within Inn Inc and cannot be seen as an isolated transaction. In light of this, the price fixed for transfer is not only for the assets but also for 100% control between the entities of the same group whose parent is same. Allowing depreciation on fictional good will in such a case would be a case of one making profit/loss out of oneself (at the cost of Revenue, which is not permissible). Reliance on the point that one cannot make loss out of oneself is placed on the decision of Hon'ble supreme Court in the case of Sir Kikabhai Premchand 24 ITR 506(SC) where in it was held that "It is well recognized that in revenue cases regard must be had to the Substance of the transaction rother than to its mere form. In the instant case disregarding technicalities it was Impossible to get away from the fact that the business was owned and run by the assessee himself. In such circumstances it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and one reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law".
:- 21 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
12. The valuation report is also faulty and in contradiction to the "Business Transfer Agreement" in working out a fictional goodwill and the mentioning the same at 792.79 Cr by assigning the same to certain intangibles in arbitrary manner without any valuation, which in fact cannot be fixed as per the "Business Transfer Agreement. It is also humbly submitted that even the second valuation report fixed the value of' 792.79 Cr not only to good will but also to other intangible assets like order book, customer relationship, distributor relationship, machine design, plastic IP, new Product design, supply chain software, right to use brand and trade mark, non-compete agreement and parts and service IP. It is humbly submitted that none of these items are valued. It is also humbly submitted that the use of IP, logos, trade marks, service marks etc of Inn is specifically barred as per the "Business Transfer Agreement". Rest of the intangibles are neither transferred nor sold by the transferor nor any tax is paid by the transferor on such transfer.
13. It is humbly submitted that when there is no transfer of the asset as well as there is no valuation of the asset, there cannot be any claim of ownership or claim of depreciation. With regard to non-compete agreement, there is no such agreement on record and even if it exists, the amount paid for non-compete agreement is capital payment and not eligible for depreciation. Reliance in this regard is placed on the following decisions:
(i) Decision of Hon'ble Delhi High Court in the case of Sharp Business System [2012] 27 taxmann.com 50 (Delhi)
(ii) Decision of Hon'ble ITAT, Chennai Bench in the case of Arkema Peroxides India (P.) Ltd [2013] 31 taxmann.com 4 (Chennai - Trib.) :- 22 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
(iii) Decision of Hon'ble ITAT, Delhi Bench in the case of Excelex Bio Polymers (P) Ltd dated 01/03/2018 in ITA No: 1110/DeI/2013 and
(iv) Decision of Hon'ble ITAT, Hyderabad Bench in the case of Mylan Laboratories Ltd [2014] 46 taxmann.com 76 (Hyderabad - Trib.) (paragraphs 48 to 52 of the decision may kindly be referred)
(v) Decision of Hon'ble Delhi High Court in the case of Pitney Bowes India P Ltd {2012] 17 taxmann.com 116 (Delhi)
14. It is also submitted that right to use distribution network does not result in an intangible asset. Reliance in this regard is placed on the decision of Hon'ble ITAT, Bengaluru in the case of Sanyo BPL ltd [2016] 75 taxmann.com 253 (Bangalore - Trib.), wherein it was held that right to use distribution network did not result in creation of any intangible asset. In the said case, the Hon'ble ITAT also held that explanation (3) to section 43(1) is applicable to cases of inflated valuation of assets purchased from a related party.
15. It is also submitted that clauses 10.2.7 and 10.2.8 of the valuation report clearly indicate that the amount is only a balancing entry and may exclude certain closing account adjustments and the conclusion does not reflect the outcome of any due diligence procedures. It is also submitted that the balancing entry treated as goodwill as per accounting standards is fictional in nature in the present case and does not represent any real intangible and the accounting procedure in double entry accounting system cannot override the provisions of Income Tax Act.
16. It is also submitted that the cost in the hands of transferor company is 'nil' by virtue of section 55(2)(a)(ii) and therefore the cost is 'nil' in the hands of the transferee-assessee also. It is also humbly :- 23 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
submitted that fifth proviso to section 32(1) is also attracted in the present case being a case of succession in an independent business and the same reads as under:
"Provided also that the aggregate deduction in respe ct of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause {xiii}, clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of ' amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them
17. It is also humbly submitted that this is a fit case for application of third proviso to section 43(1) because the business transfer agreement is part of a comprehensive international arrangement between two groups and there is no rationale for the fixation of the transfer price.
18. On the issue of non-allowability of the claim of the assessee, reliance is placed on decision of Hon'ble ITAT, Bangalore Bench in the case of United Breweries ltd. [2016] 76 taxmann.com 103 where in it was held that by virtue of 5th proviso to section 32(1), assessee being :- 24 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
amalgamated company could not claim or be allowed to claim depreciation on assets acquired in scheme of amalgamation more than depreciation that was allowable to amalgamating company. The said proviso is applicable to acquisition of assets through succession in business also which is the present case.
19. It is also submitted that the Hon'ble Supreme Court did not record any finding on the valuation of goodwill arising on amalgamation in the case of Smifs Securities [2012] 24 taxmann.com 222 (SC). The Hon'ble Supreme Court did not give any factual finding that the difference between the transfer price and the value of the assets in the books of the transferor is the value of goodwill. The Supreme Court only felt that there was no need to interfere with the factual finding of the lower authorities. As Supreme Court only decides question of law, the decision cannot be seen as a stamp of approval for the valuation of the good will as difference between transfer price and value of fixed assets.
5.1 Relying on the above submissions, the ld. DR submitted that the appeal of the assessee may be dismissed.
6. In the rejoinder, the ld. AR submitted in written form as under & which is placed on record :
In Para No. 1, the ld. CIT-DR mentions that the appellant acquired the industrial packaging unit from Wintek Flexo Prints of ITW India ltd. This is factually incorrect. ITW India Limited earlier on Feb, 2 2012, acquired a unit of Wintek Flexo Prints, a partnership firm. The said unit is only a supplemental part of the total business activity of the Industrial Packaging unit held by ITW India Limited. It is a small part of the Industrial Packaging unit held by ITW India Limited. The unit acquired by the appellant is inclusive of Wintek Flexo Prints.
:- 25 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
20. The learned CIT-DR mentioned that the appellant is aggrieved of the fact that the CIT (Appeals) did not adjudicate the issue of value of enhancement made by the AO by passing an order u/s 154 of the LT. Act. In fact, as submitted in the earlier paragraph, the appellant debited Rs. 44,04,03,000/being the depreciation on goodwill relating to the unit which was worked out in accordance with Companies Act. The appellant, while filing the return of income, claimed depreciation of Rs. 99,09,96,797/- The Assessing officer, while disallowing the depreciation adopted the depreciation as per the working made under the Companies Act. The Assessing officer, by passing an order u/s 154, rectified the mistake. The order u/s 154 is only to correct the amount of disallowance. The issue before the Honble ITAT is the question whether deprecation is allowable or not.
21. The appellant submits that as on the date of the transaction, it is not a subsidiary of ITW India Limited nor is ITW India Limited a related party u/s 40A(2) of the Income Tax Act, 1961. There is no doubt that the transfer of the unit by ITW India Limited to the appellant is on as is where is basis and as a unit as a whole and it is a slump sale. Therefore, no individual values are required to be shown by the vendor.
However, the vendee has to bifurcate the amount distributing the amount to various assets. The appellant got the assets valued by BSR & Co., and adopted the said values for the assets received from ITW India Limited. In so far as ITW India Limi ted is concerned, it has transferred the Industrial Packaging Unit to the appellant and appellant became the subsidiary of Strapex Holdings Limited, UK.
22. In paragraph 3, the learned CIT-DR is referring to Exhibit "C" of the agreement which mentions that the trade names, logos, internet addresses and domain names, trade marks and service marks and related registrations and applications are retained by the :- 26 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
transferor. However, in Section 2.1 of the Business Transfer Agreement it is mentioned that the Transferred Assets do not include any assets of the Transferor that are not primarily related to the Business [Industrial Packaging Business], including the assets setforth in Exhibit C. In other words, only those assets which are related to the Industrial Packaging Business were transferred to the transferee and those relating to the other businesses as mentioned in para 6(4) above were not transferred.
23. According to the agreement, the assets referred to above relate to other businesses of ITW India Lim ited and do not relate to the Industrial Packaging Unit. Only Such other assets are retained by ITW and none of the assets relating to the Industrial packaging unit are retained by ITW India Ltd.
24. The learned CIT-DR at paragraph 4 of his submissions mentioned that lump sum amount of Rs.1240 crores was fixed as per the agreement and that there is no basis for fixing the price. This is not correct. The valuation of various assets was entrusted to independent valuer BSR & Co. The said valuer valued the consideration based on three different acceptable methods and taken the average. In fact, during the course of hearing, the Hori'ble ITAT required the appellant to file copies of the values fixed for the lands by the respective Sub Registrar. A verification of the values fixed would clearly indicate that the land value fixed by the valuer BSR & Co., is more than the value fixed by the Sub Registrar. This clearly shows that the values are quite reasonable. Further, neither the Assessing officer nor the CIT (Appeals) pointed out any error or omission in the valuation made by BSR & Co.
25. Most importantly the appellant may be permitted to submit that the values fixed by the Valuer to all assets except the lands are accepted while completing the assessment. There is no dispute with regard to any of :- 27 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
the assets. The stocks are debited to the Profit & Loss account and the same was accepted. The value of other assets is debited to the assets account and depreciation was claimed. Such claim of depreciation is accepte d. Therefore, the values fixed to all the assets are accepted. In so far as values of land are concerned, the appellant was directed to obtain the values as per SRO. The same were obtained and are submitted in a separate paper book. A table showing the value as per SRO and the value as per the valuer is submitted. The valuer fixed a higher value for the land than the value of SRO. Therefore, the learned CIT-DR cannot now make any remarks against the valuation by BSR & Co.
26. At paragraph No.5, the learned CIR-DR mentions that the lump sum consideration was fixed on a basis which is known only to both the parties to the agreement. This is not correct. The appellant filed copy of the valuation report before the Assessing officer, before the CIT (Appeals) and placed the same in the paper book filed before the Hon'ble ITAT. The basis for value fixed for each asset is mentioned by the valuer. The values fixed by him are accepted by the department with regard to other assets as stated above. Therefore, it cannot be said that the valuation made is without any basis.
27. At paragraph 6, the learned CIT-DR mentions that both the companies i.e, the transferor and the transferee are under the control of the same management and the claim of goodwill is nothing but undue benefit at the cost of Revenue. As on the date of the transaction they are not related parties u/s 40A(2) and they are not holding and subsidiary companies. Secondly, it is submitted that the company ITW India Limited admitted capital gain of Rs.807 crores on sale of the unit and paid upfront the applicable tax on the same. It is necessary to mention that the ITW India Ltd., is taxed on the entire capital gain. Therefore, it is not correct to say that any undue benefit is derived by :- 28 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
anyone and it is not correct to say that there is any loss to the revenue.
28. At paragraph 7, the learned CIT-DR mentions that the valuer BSR & Co., was appointed by ITW Inc. It can be seen that the reference was on 30.8.2013, i.e. about two months earlier to the date of agreement. At the relevant point of time, ITW was the owner and it can only refer for the valuation. In such circumstances, there is no reason to doubt the valuation simply because a reference was made by ITW as it was the company which owned the unit. In fact after the agreement, the appellant referred the matter of valuation of independent assets to the valuer. Therefore, no adverse inference can be drawn.
29. In paragraph 8, the CIT-DR mentions that the valuer did not carry out independent verification of the financial projections and underlying data. There is no basis for making such a comment by the learned CIT- DR. To the extent of information furnished by the ITW India Ltd., the valuer examined the same and also examined the basis for such data. The assessee on perusal has come to a conclusion that the valuation made by BSR & Co., is justified. When the valuer has mentioned that if there is any failure on the part of ITW, in furnishing the data there would be a change in the values is a remark to safeguard the interest of the assessee. Further the valuation was carried out 2 months prior to the date of transaction and the business was carried on in these interim period and therefore there would certainly be a change in the values on the date of transaction. This remark is only to caution the appellant to verify the information furnished by ITW. Based on such caution, the appellant needs to make a verification and come to a conclusion. This cannot be understood in any other way.
30. At paragraph 9, the learned CIT-DR mentions that the goodwill in the year 2012 was mentioned as :- 29 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
Rs.14.32 crores on acquisition of the partnership firm Wintek Flexo Prints. It is submitted that it is a small unit and a tiny part of the Industrial Packaging Unit purchased by ITW India Limited. The goodwill value for the Wintek Flexo Prints unit cannot be the good will for the entire Industrial Packaging unit held by ITW India Limited. The total goodwill adopted includes goodwill purchased from Wintek Flexo Prints and the self generated goodwill held by the assessee.
31. In paragraph 10, the learned CIT-DR mentions that the purchase price allocation by the appellant is done based on the report dated 2.6.2014. It is submitted that in so far as the seller is concerned, there is only one value for all the assets together in a slump sale. However, in the case of the purchaser, each asset has to be given a value for the purpose of recording the assets in the books of account. The valuation report dated 2.6.2014 is obtained for such purposes. Also, ICDS- V issued by the CBDT, mandates that in case of transactions involving lumpsum consideration, the same has to be allocated to the various assets acquired on a fair basis.
32. In paragraph 10, the CIT-DR referred to Explanation 4A to Sec.43(1) of the I.T.Act. This explanation refers to a situation where the assessee purchases the asset but such assets are used by the vendor under lease, hire or otherwise and the purchaser does not use them. In so far as the assets acquired by the appellant from ITW India Limited, the purchase is complete and the assets were always used by the appellant, the purchaser. Hence Explanation 4A to Sec 43(1) is inapplicable to the appellant's case.
33. In paragraph 11, the CIT-DR mentions that the purchase consideration is for acquisition of 100% equity and to acquire control over Management. For this purpose, the CIT-DR refers to the word "equity" used at Clause No.1 0.2 of the second valuation report.
:- 30 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
The CIT-DR is under a mistaken impression that the word "equity" was used to denote share capital. The meaning of the word "equity" may kindly be analyzed. According to the Black's Law Dictionary 6th Edition the meaning of the word "equity" also or an enterprise over and above the indebtedness against it". The word "equity" in the valuation report is used to denote the value of the property over and above the indebtedness of the unit acquired. Therefore, the other observations made by the CIT IDR are not relevant to the facts of the appellant's case. It is submitted that there is no such intention for the appellant to acquire any equity of ITW India Limited. In fact, the appellant did not acquire shares but it acquired the Industrial Packaging unit which would mean that the appellant had no intention to participate in the management of the ITW India Limited. The observations made by the CIT JOR are, therefore, not relevant to the facts of the case.
34. In paragraph 12, the CIT-DR mentions that the value of the goodwill worked out is a fictional goodwill.
(a) Firstly, it is submitted that the value given to the goodwill is not fictional. It is the value of the intangible assets like order book, customer relationship, distributor relationship, machine design etc. The appellant got all the assets both tangible and intangible relating to the industrial packaging division of ITW India Limited.
(b) Secondly, it is submitted that the use of IP Logos, trade marks, service marks etc. of ITW relating to the other businesses retained by ITW India Limited are retained by ITW and are not allowed to be used by the appellant. Therefore, the observations made by the CIT JOR at para No.12 are not justified.
35. In paragraph No.13, the CIT JOR mentioned that depreciation on any amount paid towards non compete fee is not allowable. The appellant humbly submits that :- 31 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
there is no non compete agreement with ITW India Limited and, therefore, the decisions mentioned by the CIT JOR at para 13 are not relevant. Without prejudic e, we would like to bring to your notice that ITW has exited the Industrial Packaging Business post the slump sale.
36. In paragraph No.14, the CIT JOR mentioned that the distribution network does not result in any intangible asset and for this purpose, the learned CITjOR referred to the decision of Sanyo BPL Ltd. (2016) 75 taxmann.com 253 (Bangalore-Trib.). The appellant in this regard submits that the total business unit is valued. The tangible assets i.e. the movable and immovable are also valued. There are various commercial rights for ITW India Limited besides having experienced staff etc. It is an establishment already existed and there was an existing business activity with all the facilities. Those facilities which were not acquired with money but which were self-acquired are part of the assets which form part of the intangible assets. They are called as goodwill and depreciation is claimed on such assets.
37. In paragraph No.1S, the CIT-DR mentioned that the goodwill is only a balancing entry and is fictional in nature. For the reasons submitted in the above paragraphs, the CIT-DR is not correct to mention that it is fictional in nature and is only a balancing entry. It is derived by recognized method of valuation and consideration was paid by the appellant and duly received and capital gain offered to tax by the seller. The method of valuation of goodwill as is done by the appellant is recognized by various judicial authorities as mentioned in the earlier paragraphs.
38. In paragraph No.16, the CIT-DR mentioned that fifth proviso to section 32(1) is also attracted in the present case being a case of succession. Firstly, it is submitted that there is no succession either as per :- 32 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
Sec.170 or as per Section 47 of the I.T. Act. The vendor ITW India Limited has paid capital gain tax and did not claim any exemption in view of Sec A 7. It was considered as a transfer and was not claimed as exempt under any of the clauses of Section 47 of the I.T. Act. In so far as Section 170 is concerned, the said section has no application to the facts of the appellant's case. The entire business activity was not taken over by the appellant from ITW India Limited. Only a part of the business activity i.e. the industrial packaging unit alone was taken over. Further, a reading of Sec.170 refers to assessment of the person who has transferred the assets and not the person who acquired the asset. Therefore, fifth proviso to Sec.32(1) has no application to the facts of the case. The appellant may submit that depreciation on goodwill now claimed was not allowed in the case of ITW and therefore, the restrictions mentioned in sec. 32 or 43 are not applicable to the facts of the case.
39. In paragraph 17, the CIT IDR mentioned that it is a fit case for application of third proviso to Sec.43(1) of the I.T. Act because the business transfer agreement is a part of the comprehensive international arrangement between two groups and there is no rationale for the fixation of the transfer price. The observations made by the CIT IDR are not correct. Firstly, the valuation is made by a registered valuer in accordance with the accepted method of valuation. Secondly, the third proviso to Sec.43(1) clearly mentions that it should be for the Assessing Officer to conclude whether such provision is applicable or not. Once he decides that such section is applicable, he has to obtain the approval of the Joint Commissioner of Income Tax and apply the said section. In this case, the Assessing Officer never applied the provisions of Sec.43(1) and did not obtain any approval from the Joint Commissioner. Even the CIT (A) did not mention about sec.43(1) of the I.T. Act. The CIT IDR cannot now ask for the same. Thirdly ITW India Limited did not claim depreciation on goodwill. Unless a claim for depreciation was made by the Vendor and :- 33 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
was allowed, the provisions of Sec.43(1) have no application. Fourthly, without prejudice to the above, it was never the intention of the appellant to claim enhanced depreciation by way of this transaction. In fact, the entire transaction was solely for the acquisition of the business of the Industrial Packaging Unit but not for the acquisition of any particular asset. Hence the provisions of Explanation 3 to Sec 43( 1) wi ll not apply to the case of the appellant. Further, the entire capital gain on the transaction was offered to tax by the seller.
40. In paragraph No.18, the CIT-DR is referring to the decision of the Hon'ble ITAT, Bangalore in the case of United Breweries Ltd., (2016) 76 taxman.com 103 and is referring to the fifth provision to Sec.32(1) of the I.T. Act. It is submitted that the said proviso is applicable to a case of amalgamation or succession. In the case of the appellant, it is neither amalgamation nor a succession but is an acquisition of a part of the business activity. The transaction is not treated either as amalgamation or succession by either the Assessing Officer or by the Commissioner of Income-tax (appeals).
41. In paragraph No.19, the CIT-DR mentioned as to how the decision of Supreme Court in the case of Smifs Securities is not applicable to the facts of the appellant's case. In this regard, it is submitted that the Hon'ble Supreme Court did not merely dismiss the SLP but expressly held that the goodwill is entitled for depreciation and that the difference between purchase value and the value of the assets as reduced by the liabilities represents goodwill. The said decision is, in all force, applicable to the facts of the appellant's case. It is further submitted that the Calcutta High Court allowed the appeal of the appellant by recording a reasoned order. The said order is confirmed by the Apex Court after discussing the issue. There are various other judicial pronouncements to this effect as listed.
:- 34 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
42. The decisions relied upon by the CIT DR are not applicable to the facts of the case. They are discussed hereunder:
a) The decision of the Supreme Court in the case of Sir Kikabhai Pemchand Vs. CIT reported in 24 ITR 506 is not applicable to the issue as the question answered by the Supreme Court is different from the issue on hand.
b) The decisions of the High Court of Delhi in the case of Sharp Business systems Vs. CIT reported in 27 taxman.com. 50 and the decision of ITAT Chennai Bench in the case of Arkema Perozides India Vs ACIT have no application as the said decisions deal with the depreciation on non-compete fee paid. The said decisions have no application as the appellant did not claim depreciation on non-compete fees and it is never a question either before the AO or before the CIT (A).
c) The decision of the ITAT Delhi bench in the case of DCIT vs. Excelex Bio Polymers (P) ltd., also has no application as it deals with non-compete fee.
d) The decision of the Hyderabad Bench of the ITAT in the case Mylan Laboratories Ltd., Vs. ACIT has no application as it is a transfer n'icing issue and different from the case of the appellant.
e) The decision of the Bangalore Bench of the ITAT in the case of Sanyo BPL (P) ltd., vs. DCn has no application as in the said case the question is depreciation on distribution net work.
f) The decision of the Bangalore Bench of the ITA T in the case of United Breweries Ld., Vs. Addl. CIT has no application to the facts of the appellant's case as it is a case of acquisition of property through amalgamation.
In the case of the appellant it is no amalgamation.
:- 35 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
43. In view of the explanation submitted, none of the decisions mentioned by the learned CIT/DR are applicable to the facts of the case of the appellant. It can be seen from various provisions granting depreciation on the assets received on transfer that depreciation is restricted wherever the capital gain on transfer of the transferor is exempted and there is no restriction wherever the capital gain arising to the transferor is taxed. The other ground for restriction of depreciation is when there is an attempt to av oid tax. In the case on hand, the transferor i.e., ITW India Ltd., admitted the capital gain and is taxed. Therefore, the restrictions are not applicable.
7. We have pursued the case file, paper books, arguments of both the sides & considered the written submissions filed by both the learned counsels.
7.1 The AO, while passing Assessment Order, has noticed that the assessee claimed Depreciation of Rs.
106,30,21,315/- as per Act, of which Depreciation on tangible assets is Rs.407.88 lakhs and on intangible assets of 4404.43 lakhs. In detail, the assessee has purchased a packaging unit of M/s ITW lndia Limited for a consideration of Rs.1240 crores on slump sale and on "as is where is"
which includes various assets and capital work-in-progress, cash and equivalents, receivables, inventory etc., the value :- 36 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
of which was based on the valuation done by independent valuers Mis B.S. R. & Co. -Whereas, M/s. ITW India Limited did not record any goodwill in its books of account but the assessee has determined the same on the pretext that the same is having a sizeable market share in the packaging activities and clientele basis, which was not acceptable to the AO. The AO further stated that M/s. ITW India Limited recorded goodwill on account of its acquisition of Wintek Flexo Prints, partnership firm, in the financial year ending 31.03.2012 and on similar analogy, it has recorded intangible assets on account of same transaction. He has also pointed out that prior to slump sale, M/s. ITW India Limited did not have any goodwill or intangible asset in its books. The AO opined that the goodwill existing in the books of ITW India Limited is relatable M/s Wintek unit acquired by it in earlier year and not pertain to the un it purchased by the assessee. The AO has also concluded that the valuation report is neither justifiable nor supported by any factual or legal rights existing or occurring in the true sense to treat them u/s 32 of the Act, and thereby :- 37 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
disallowed Rs.44,04,03,000/- on account of good will and other intangibles.
7.2 When the assessee preferred an appeal before the CIT(A) and made elaborate submissions with case law, which were extracted by the CIT(A) in his order at pages 4 to 9. After considering the same, the CIT(A) confirmed the assessment order by observing as under:
"13. After careful examination of the Assessment Order, and submissions made by the AR before me, I am of opinion that the observations made by the AO, that prior to slump sale, ITW India Limited did not have any good will or intangible asset in its books and the good will existing in the books of ITW India Limited is relatable to M/s Wintek unit acquired by it earlier year and not pertain to the unit purchased by the appellant. The good-will introduced in the appellant's books is completely new and artificial and is not equitable to commercial rights or business rights as defined in the Act. Moreover, the valuation report made by the independent valuers MIs B.S.R. & Co. also did not record any good will in its books. Therefore, I am in agreement with the view of the AO and the addition made by the AO of Rs.44,04,43,OOO/- as "disallowance of the depreciation" is confirmed and the grounds raised in this regard are dismissed."
7.3 As far as the merits of the issue of disallowance is concerned, the CIT(A) while confirming the disallowance :- 38 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
relied on the observations made by the AO that "prior to slump sale, ITW India Limited did not have any good will or intangible asset in its books and the good will existing in the books of ITW India Limited is relatable to M/s Wintek unit acquired by it earlier year and not pertain to the unit purchased by the appellant. The good-will introduced in the appellant's books is completely new and artific ial and is not equitable to commercial rights or business rights as defined in the Act. Moreover, the valuation report made by the independent valuers M/s B.S.R. & Co. also did not record any good will in its books."
7.4 We have gone through the valuation made by an independent valuer named M/s BSR & Co. We are reproducing from the reports of the said independent valuer, are as under:
2 Terms of engagement 2.1 BSR and Associates Chartered Accountants ("BSR") has been appointed by Illinois Tool Works Inc. ("lTW" or the "Client") to act as financial advisor in relation to proposed slump sale of Signode India by ITW India Limited to Signode India Limited ("Project Total").
:- 39 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
2.2 BSR is to undertake a valuation of the Division ("the "Valuation") as at 30 June 2013 ("Valuation Date"). The Valuation is to be used for the proposed slump sale only.
2.3 ........................
2.4 ........................
2.5 .........................
2.6 This Report is based on the information provided by the Client and has been confirmed by the Client. We have not independently verified or checked the accuracy or timeliness of the same.
7.5 The scope and limitation of work is as under:
"3.2 This Report is based on and relies solely on the Management Business Plan provided by the Management of ITW for the period 01 July 2013 to 31 December 2019 ("Management Business "Plan"). B S R has read and analyzed but not independently verified the financial projections and underlying data and assumptions and accordingly provided no opinion on the factual basis of the same. If there were any omissions, inaccuracies or misrepresentations of the information provided by the Management of ITW, this may have a material effect on our findings.
"3.9 We have heard our analysis on the unaudited financial statements for the Division for the period 1 January, 2010 to 31 December 2012 and provisional financial statement for the period 1 January 2013 to 30 June 2013. Additionally, our analysis is based on Management Business Plan for the period 1 July 2013 to 31 December 2019. Any changes in the assumptions or methodology used to consolidate the :- 40 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
financial statements may significantly impact our analysis and therefore the Valuation.
7.6 Sources of Information:
"4.1 Unaudited financial statement of Signode for the period 1 January, 2010 to 31 December 2012 and Provisional Financial Statement of Signode for the period 1 January 2013 to 30 June 2013 ("Historical Period") 7.7 Under the DCF Method the growth rate is as under:
2013 2014 2015 2016 2017 2018 2019 Tv
6mts 12 mts 12 mts 12 mts 12 mts 12 mts 12 mts
Revenue 4889.5 11153.1 13052.7 15262.5 17889.8 20036.5 21238.7 218 75.9
14% 17% 17% 17% 12% 6% 3%
7.8 7.1.4 As per AS 14: Accounting for Amalgamation,
under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.
7.9. 8.1.14 From the tangible assets valuation perspective, the market approach measures the value of an asset through an analysis of recent sales or offerings of comparable assets. When applied to the valuation of an asset, consideration is given to the financ ial condition and operating performance of the company that owns the asset.
:- 41 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
8.1.15 We have used market approach for valuation of land and commercial/ office space.
Cost Approach:
8.1 .17 From the tangible assets valuation perspective, the cost approach measures the value of an asset based on the cost to replace it new with an identical or similar unit of equal utility. Under this approach, replacement cost new or reproduction cost new of the asset is determined first and then fair value is determined by adjusting the replacement cost new or reproduction cost new by the loss in value due to physical deterioration and functional and economic obsolescence.
7.10 8.1.19 Land - Market approach (Sales comparison method)/ Sales comparison method establishes value of an asset through the analysis of recent transactions/ sales/ transfers or offerings/ bid prices of comparable assets. For valuation of specified industrial land, V prevailing market rate of land based on recent transactions/ sales/ transfer or bid prices applicable for similar type of industrial land in the nearby locality has been considered as basis. We made enquiries ) with local real estate agents/ dealers, land allotment authorities and also relied on various data sources to establish the prevailing market rate of similar type of land in the vicinity of the specified land.
Due consideration has been given, on broad level basis, to factors such as negotiation discount, location and accessibility, land use, size and shape, frontage, developed/ undeveloped condition etc., while arriving at market rate of specified industrial land parcels. We have relied on verbal enquiries as it is difficult to get written commitments regarding market rates given the sensitivity of information.
8.1.20 Buildings and civil infrastructure - Cost approach (Depreciated replacement cost method) In :- 42 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
depreciated replacement cost (DRC) method, DRC of buildings and civil infrastructure works has been estimated using replacement cost new (RCN) as the basis. RCN means price expected to replace/ reproduce the existing asset with similar or equivalent new asset as on the Valuation Date.
Following factors have been considered while arriving at RCN of buildings and civil infrastructure works:
• type of construction of buildings and civil infrastructure works • technical parameters such as type of foundation, specification of finishes, floor to floor height of building etc., • built-up area of buildings • areal quantity of civil infrastructure works • unit rate of construction of similar type of buildings and civil infrastructure works, around the Valuation Date, in the nearby vicinity RCN of buildings and civil infrastructure works was then depreciated based on used life (age) and total useful life of buildings and civil infrastructure works to arrive at its DRC Straight line method has been adopted for depreciation calculation considering suitable percentage of RCN (depending on the type of construction) as salvage value.
7.11 Tangible fixed assets:
9.5.1 Basis of valuation General :- 43 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
• We have assumed that specified land and buildings have a clear and marketable title and are transferable, without any independent verification from our side. We have not carried out the title search with respect to the specified land and the information as provided by the Management has been considered as the basis for our valuation.
• The valuation is carried out on the assumption that specified land and buildings are free from any litigation, encumbrances, encroachments, etc. and are transferable. No input of any kind of liabilities has been considered in the valuation. We have not carried out any legal technical due-diligence with respect to the specified tangible assets as it was not part of our scope of work.
• As part of the PPA, we have carried out fair valuation of specified land and buildings. Other assets group such as plant & machinery, office equipments, furniture & fixtures, motor vehicles etc. have been considered at respective net book value as at Valuation Date as per the information provided by the Management.
• We have not verified any regulatory approvals related to operation of specified tangible fixed assets, including the clearance from other regulatory authority as it was beyond our scope of work.
Specific to Land • Details such as land area, land use etc. of specified land has been considered based on the information and representation provided by Management.
• As normally practiced, transaction costs like stamp duty, registration charges, brokerage, legal expenses etc. pertaining to sale/purchase/transfer of the land :- 44 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
have not been considered while estimating the fair value of land.
• Market price related information pertaining to similar land parcels available for sale in the nearby locality of specified land, based on the information provided by local real estate agents/ dealers has been taken as the basis for valuation analysis.
• There are no authentic databases/official market data sources of prevailing market rates of real estate properties in India. The transaction rates maintained in the sub-registrar office are not fully reliable and may not be reflective of actual transaction rates. Therefo re, it is an accepted valuation practice to rely on verbal enquiries on prevailing market rates of land from local real estate agents I property dealers I market players in good faith during site visits based on the recent transactions of similar properties or asking prices of properties available for sale/transfer in the locality. Since discussion with the real estate brokers/market players are verbal and brief only and they having no obligation to tell their true market perception of the prices and quality of title of available properties for sale, our analysis is limited to that extent.
Specific to Buildings and civil infrastructure works • Details such as built-up area of buildings, areal quantity of civil infrastructure works etc. have been taken based on the information provided by the Management. As informed by the Management, we understand that the built-up area of buildings provided to us is based on the as-built drawings of buildings.
• We have been given to understand that buildings constructed are within legally permissible built-up area and conforming to rules and regulations of concerned local development authority, which has not been :- 45 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
independently verified by us as independent verification was out of our scope of work.
• We have assumed that required and relevant policies and practices of maintenance adopted by Signode would be continued in future also.
• Year of construction of the buildings and civil infrastructure works as per the details provided by the Management has been taken as the base year for estimation of age of the buildings and civil infrastructure works used for depreciation calculation.
All these assumptions and presumptions made by the Valuer has rightly been negated by the authorities below as well as Ld. CIT-DR. In this case, there is a transfer of all fixed assets including lands and buildings as well as current assets. The lands value has not been accepted by the AO , the plant and machineries have been transferred at the book value as was done in the former unit of ITW India Ltd.
We note from the valuer's report that the assets have been recorded at their fair value, the fair value has not been defined anywhere in the report of the Valuer. The book value of the depreciable assets are not fair value. It is just a notional depreciated value provided by the assessee in its books of account. Certainly the fair value would be different from the recorded value as noted infra . In case of :- 46 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
lands, the authorities below have rightly dealt this issue.
The financial growth is constant for 2015, 2016 & 2017 and thereafter, it is going down which is not a good sign of the future business prospects and the assessee has recorded huge amount of goodwill in his books of account after purchasing a unit of the ITW India Ltd.
7.12 During the year, the company has purchased industrial packaging business from ITW India Ltd on slump sale basis. Based on independent valuation total purchase consideration of Rs. 124,000.00 lacs has been allocated to following assets as under as per note no. 36 of the Balance Sheet for the impugned assessment year :
Particulars Rs. in lacs Rs. in lacs
Fixed Assets
Land 3,400.00
Building 3,066.22
Machinery & Equipment 6,739.48
Capital work in progress 640.79
Goodwill and other intangibles 79,279.74 93,128.23
Current Assets:
Cash and cash equivalents 3,009.18
Receivables 23,657.23
Inventory 10,349.89
Other current assets 5,306.04 42,322.34
Long term trade receivables 112.73
Current Liabilities:
Trade Payables (6,012.00)
Other Liabilities (5,466.77) (11,478.77)
Long term finance lease (84.53
:- 47 -: ITA No. 954 /Hyd/19
S i g no d e I n di a L t d . , H y d .
obligations
Net assets purchased 124,000.00
7.13 We observe the fact that the basis for transfer
price is in the individual knowledge of the transferor and transferee and also the fact that both the parties are under the control of same management clearly indicate that the claim of fictional goodwill is nothing but deriving undue benefit out of oneself at the cost of Revenue.
7.14 We observe that the two valuation reports of BSR Associates which are available at pages 111 to 191 of the first paper book filed by the assessee has limited relevance in the above context. The first valuatio n report is dated 28/10/2013 with valuation date 30/06/2013 as per statement of work assigned by ITW Inc on 30/08/2013.
From the terms of engagement available at clause 2 of the note of the valuers (at page 117 of the paper book filed by the assessee), it is evident that BSR Associates was appointed by Illinois Tool Works Inc (ITW) which is mentioned as client by the valuer to act as financial advisor :- 48 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
to the proposed slump sale. From the fact that it is the parent company which appointed the valuer and not the assessee, it is apparent there is unfair fixation of transfer price to benefit the transferor at the cost of the assessee, the matter being an affair between parent of the assessee and the assessee. It is also clearly stated in the terms of the agreement that the valuation is for the purpose of slump sale only and not for the purpose of arriving at a fictional goodwill after the slump sale.
7.15 We observe that at clause 3 of the valuation report which mentions the scope and limitation of the work, it is evident that the report is based and relies solely on the underlying management assumptions and management business plans provided by the management of ITW Inc and the valuer did not carry out independent verification of financial projections and underlying data.
The valuer also clearly states that he does not express any opinion on the factual basis of the information and if there were any omissions, inaccuracies or misrepresentation of :- 49 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
the information provided by the management of ITW, this may have a material effect on his findings. Therefore, the valuation report is nothing but an arithmetical exercise feeding management given input into a financial model to arrive at mere numbers without much support. The BSR and Co. has relied only on the unaudited data provided by the Management without verifying the reliable financial data of the companies. The valuer has relied on the unaudited financial data which cannot give correct result / valuation of the assets and liabilities, financial projections etc .
Therefore, the accuracy of the resultant valuation is not reliable. The authorities below have also questioned the valuation reports submitted by the assessee.
7.16 As seen from clause 5.2.6 of the report of the valuer, Signode recorded goodwill of Rs. 143.20 Cr in Calendar Year 2012 on account of acquisition of the partnership firm Wintek Flexi Prints. As per clause 6.1.2.4 of the report, goodwill of Rs. 143.20 Cr was expected to remain constant throughout the forecast period. However, a :- 50 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
much higher value of fictional goodwill is computed merely on the basis of balancing charge based on arbitrary price fixed for transfer.
7.17 The second valuation report is dated 02/06/2014 and is meant for purchase price allocation of Signode India Division of ITW India Limited. This report is also as per the terms of engagement with ITW Inc. This report is also of limited value and relevant only for the purpose of claiming depreciation on the assets acquired as per Explanation 4A to section 43( 1) which reads as under:
"Explanation 4A. -Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the assets were at any time u sed by any other person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person and such person acquires on lease, hire or otherwise assets from the first mentioned person, then, notwithstanding anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned person, shall be the some as the written down value of the said assets at the time of transfer thereof by the second mentioned person".
:- 51 -: ITA No. 954 /Hyd/19
S i g no d e I n di a L t d . , H y d .
7.18 Clause 10.2 of the second valuation report
clearly indicate that the purchase consideration is for acquisition of 100% equity. Therefore, the price is paid f or 100% control of equity and more in the nature of premium for acquisition of 100% equity control and therefore the balancing charge is not in the nature of goodwill. We find that during the relevant Previous year, just one day before the business transfer, the ownership;' of the assessee changed by way of transfer of share capital from the transferor (Inn India Ltd) to Strapex Holdings Ltd, UK.
Therefore, the transfer of the packaging unit is part of a comprehensive business arrangement within Inn Inc and cannot be seen as an isolated transaction. In light of this, the price fixed for transfer is not only for the assets but also for 100% control between the entities of the same group whose parent is same. Allowing depreciation on fictional good will in such a case would be a case of one making profit/loss out of oneself. In such circumstances, we are of the view that it was wholly unreal and artificial to separate the business from its owner and treat them as if :- 52 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
they were separate entities trading with eac h other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and one reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income -tax law".
7.19 We observe that the valuation report is also faulty and in contradiction to the "Business Transfer Agreement" in working out a fictional goodw ill and the mentioning the same at 792.79 Cr by assigning the same to certain intangibles in arbitrary manner without any valuation, which in fact cannot be fixed as per the "Business Transfer Agreement. Even the second valuation report fixed the value of' 792.79 Cr not only to good will but also to other intangible assets like order book, customer relationship, distributor relationship, machine design, plastic IP, new Product design, supply chain software, right :- 53 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
to use brand and trade mark, non-compete agreement and parts and service IP. None of these items are valued. As per section 2 of the Transfer Deed, the following assets as per exhibit "C" which were not to be transferred which is as under:
"All Intellectual Property of Transferor, other than the Business Intellectual Property.
All trade names, logos, Internet addresses and domain names, trademarks and service marks and related registrations and applications used in the business that consist of or contain "ITW", "ILLinois Tool Works" or any derivation thereof. :
As per assessee's contention the business has been transferred as a going concern to the transferee, but, as per the above "section 2" the intellectual property of the transferor has not been transferred the above assets, then how the assessee has calculated all intangible assets in the form of goodwill.
7.20 We observe that when there is no transfer of the asset as well as there is no valuation of the asset, there cannot be any claim of ownership or claim of depreciation.
With regard to non-compete agreement, there is no such :- 54 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
agreement on record and even if it exists, the amount paid for non-compete agreement is capital payment and not eligible for depreciation.
7.21 We notice that clauses 10.2.7 and 10.2.8 of the valuation report clearly indicate that the amount is only a balancing entry and may exclude certain closing account adjustments and the conclusion does not reflect the outcome of any due diligence procedures. The balancing entry treated as goodwill as per accounting standards is fictional in nature in the present case and does not represent any real intangible and the accounting procedure in double entry accounting system cannot override the provisions of Income Tax Act.
7.22 We observe that the cost in the hands of transferor company is 'nil' by virtue of section 55(2)(a)(ii) and therefore the cost is 'nil' in the hands of the transferee -
assessee also. Fifth proviso to section 32(1) is also :- 55 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
attracted in the present case being a case of succession in an independent business and the same reads as under:
"Provided also that the aggregate deduction in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause {xiii}, clause (xiiib) and clause (xi v) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of ' amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them 7.23 We are of the opinion that this is a fit case for application of third proviso to section 43(1) because the business transfer agreement is part of a comprehensive international arrangement between two groups and there is no rationale for the fixation of the transfer price.
:- 56 -: ITA No. 954 /Hyd/19
S i g no d e I n di a L t d . , H y d .
7.24 In the case of United Breweries Ltd., [2016 ] 76
Taxmann.com 103 (Bang. Trib.), on which reliance placed by the ld. DR, the coordinate bench has held as under:
"During the year under consideration the assessee inter alia amalgamated its wholly owned subsidiary KBDL. The assessee acquired the entire shareholding of the company from the shareholders for consideration of Rs. 180.52 crores. In the books of account the assessee has recorded the value of the assets on the basis of revaluation done by the valuer and thereby shown the goodwill at Rs.62.30 crores, The Assessing Officer has not accepted the claim of depreciation on goodwill by holding that the assessee has not acquired any intangible assets in pursuant to the amalgamation of its subsidiary with the assessee and therefore as per the Assessing Officer the goodwill was not at all in existence. It is pertinent to note that the Assessing Officer has the jurisdiction and power to examine the valuation of the assets as per Explanation 3 to section 43(1). It is clear from the Explanation 3 to section 43(1) that if the Assessing Officer is satisfied that the main purpose of the transfer of such assets was the reduction of liability to income tax by claiming depreciation on the enhanced cost then the actual cost to the assessee shall be determined by the Assessing Officer. In the case on hand, since there is an amalgamation of the subsidiary with the assessee therefore all the assets which came to the assessee are already in use by the subsidiary and consequently the valuation of all the assets are subjected to the verification of the Assessing Officer as per Explanation 3 of section 43(1). However, the Assessing Officer chose to examine the valuation of goodwill alone in order to disallow the claim of depreciation on the enhanced value of goodwill. It is found that the Assessing Officer has not adopted any prescribed or well accepted method for valuation or actual cost of the goodwill in :- 57 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
the hands of the assessee but he has doubted the valuation of the tangible assets and was of the view that the assessee has deflated the valuation of the tangible assets by the method of cost of replacement instead of FMV. The scope and objective of the Explanation 3 of section 43 (I) is to check the excess claim of depreciation by enhancing cost of assets acquired which were already in use by other person. Therefore in case of valuation of goodwill the Assessing Officer ought to have examined the valuation of all the assets taken over by the assessee under the amalgamation and thereby to determine the actual cost to the assessee for the purpose of claim of depreciation. In this case there is no doubt that the value of the goodwill was shown in the books of the KBDL at Rs.7.45 crores which has been enhanced in the books of account of the assessee to Rs.62.30 crores. The assess ee has forcefully contended that the valuation of the goodwill is nothing but only the differential value between the consideration and FMV of the tangible assets. Thus the assessee has contended that Assessing Officer cannot disturb the valuation of the goodwill when it is a differential amount between the consideration and the FMV of the tangible assets. If such claim of goodwill and depreciation is allowed then it would render the provisions of Explanation 3 to section 43(I) redundant, otherwise in every case of transfer, succession or amalgamation the party would claim excessive depreciation by assigning arbitrary value to the goodwill. Therefore the entire assets taken over by the assessee under the amalgamation are subjected to the Explanation 3 of section 43(1) and if the Assessing 0fficer finds that the assessee has claimed excess claim of depreciation by enhancing the cost of goodwill then actual cost of goodwill can be determined only by considering the actual cost of the other assets so acquired under amalgamation.
There is another aspect involved in this issue of claiming depreciation on the enhanced cost of goodwill :- 58 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
in cases of succession/amalgamation as it is restricted in the hand of successor or amalgamated company only to the extent as apportioned between the amalgamating and amalgamated company in the ratio of number of days for which the assets used by them. Further the deduction shall he calculated at the prescribed rate as if the amalgamation has not taken place. This proviso to section 32(1) provides that depreciation allowable in the case of succession, amalgamation or merger, demerger should not exceed the depreciation allowable had the succession not taken place. In other words, the allowance of depreciation to the successor/amalgamated company in the year of amalgamation would be on the written down value of the assets in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company. The case of amalgamation is not regarded as transfer for the purpose of capital gain as provided under section 47(vi) and therefore such cases are exempted from capital gain which is otherwise chargeable to tax on transfer of assets. In the case on hand the business of the subsidiary was transferred to the assessee by way of amalgamation therefore it would not be regarded as transfer of asset for the purpose of capital gain. Hence the claim of depreciation on the assets acquired under the scheme of amalgamation is restricted only to the extent if such amalgamation has not taken place. The Assessing Officer made a reference to 5th proviso to section 32 and held that as per 5th proviso under section 32(1)(ii), the aggregate deduction i u respect of depreciation on any tangible or intangible assets allowable to amalgamating company and the amalgamated company shall not exceed the deduction calculated at the prescribed rates as if the amalgamation had not taken place and such deduction shall be apportioned between these companies in the ratio of period of usage of assets. In view of this explanation, KBDL was not claiming any goodwill as an asset eligible for depreciation. If amalgamation is not considered, there :- 59 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
would not he any deduction of depreciation on goodwill. Therefore, under this provision also, the assessee is not eligible for depreciation on goodwill. However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. 11 is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(ii) then the valuation issue become irrelevant. The Commissioner (Appeals) has also concurred with the view of the Assessing Officer regarding the applicability of the 5th proviso to section 32(1). It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Therefore, by virtue of 5th proviso to section 32(1), the depreciation on the hands of the assessee is allowable only to the extent if such succession has not taken place. Therefore, the assessee being amalgamated company cannot claim or be allowed depreciation on the assets acquired in the scheme of amalgamation more than the depreciation is allowable to the amalgamating company. The consideration paid by the assessee for acquiring the shareholding of the subsidiary in the earlier years is not relevant for the issue of depreciation on the assets taken under amalgamation and for the purpose of 5th proviso to section 32(1). Accordingly, in view of the above facts and circumstances of the case as well as the above discussion, it is held that the claim of depreciation in the hands of the assessee is subjected to the 5th proviso to section 32(1). Accordingly, this issue is decided against the assessee."
7.25 In view of the above discussion, we do not find any infirmity in the order of CIT(A) in confirming the disallowance of the claim of depreciation of Rs.
44,04,03,000/- and dismiss the ground Nos. 2 to 6 raised by :- 60 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
the assessee on this count. The case laws relied by the ld.
Authorized Representative are not applicable in the present facts of the case. The ld. Authorized Representative could not controvert the findings recorded by the authorities below.
7.26 The assessee contended in the grounds of appeal that the CIT(A) ought to have considered that the disallowance of the claim of depreciation by the AO as per order u/s 154 was Rs. 99,09,96,797/- and not Rs.
44,04,03,000/-, therefore, the CIT(A) ought to have decided the appeal against disallowance of depreciation of Rs.
99,09,96,797/-.
7.27 On perusal of record, we find that the assessment order was passed on 30/12/2016 u/s 143(3) of the Act by making disallowance of depreciation at Rs.
44,04,43,000/-. The AO enhanced the addition to Rs.
99,09,96,797/- by issuing notice u/s 154 dated 21/24/04/2017 and passed order u/s 154 on 24 th August, :- 61 -: ITA No. 954 /Hyd/19 S i g no d e I n di a L t d . , H y d .
2017 enhancing the disallowance to 99,09,96,797/ - instead of Rs. 44,04,43,000/- made u/s 143(3) order. On perusal of grounds raised by the assessee before the CIT(A), which were mentioned at page 2 of CIT(A)'s order, in ground No. 2 the assessee mentioned disallowance of depreciation of Rs.
99,09,96,797/- and nowhere in the grounds mentioned the appeal is against 154 order. The CIT(A) nowhere discussed about the enhancement of disallowance u/s 154 order. The CIT(A) decided the issue against 143(3) order. Therefore, the issue of enhancement addition is raised before us for the first time which is not decided by CIT(A) cannot be accepted, hence, this ground raised by the assessee in regard to enhanced depreciation is not entertained and accordingly, dismissed.
8. In the result, appeal of the assessee is dismissed.
Pronounced in the open court on 24 th February, 2021.
Sd/- Sd/-
(S.S. GODARA) (LAXMI PRASAD SAHU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 24 th February, 2021.
:- 62 -: ITA No. 954 /Hyd/19
S i g no d e I n di a L t d . , H y d .
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copy to :
1 Signode India Ltd., 3 rd Floor, Jyothi Majestic,
8-2-120/84, Road No. 2, Banjara Hills, Hyderabad.
2 DCIT, Circle - 3(2), 7 th floor, Signature Towers, Kondapur, Hyderabad.
3 CIT(A) - 4, Hyderabad.
4 Pr. CIT - 4, Hyderabad 5 ITAT, DR, Hyderabad.
6 Guard File.